Last November, Shell and other foreign investors lost a controlling stake in the $20 billion Sakhalin II oil and gas project to state-owned energy giant Gazprom. The Kremlin used the fact that Shell had doubled the projected costs of the project, in contravention of its production-sharing agreement of 1994, to open it up to other bidders, thus paving the way for Gazprom to take control.
How do foreign investors protect their assets in such circumstances? Having a local partner with the right connections is one way and adhering to the rules is another: if investors do everything they have agreed to do to the letter, they will hand the government less ammunition to use against them. However, even the most experienced investors in Russia can find that they are suddenly out of favour with the authorities, a sign that pressure will be brought to bear on them in some way.
In spite of the risks, Russia remains a highly attractive place for foreign investors. Boosted by high energy prices, its GDP is growing at 7% per year and the infusion of billions of petro-dollars into its economy has created an affluent middle class eager for consumer products. Our special report provides an in-depth guide into how to navigate your way through the complex Russian market.